Europe’s competitiveness divide

Greece, Italy, Portugal and Spain have a serious structural competitiveness problem, despite the billions of EU taxpayers’ money that these countries received as grants from EU development funds in the past decades, says Martin Bruncko.

Martin Bruncko is the Slovak government's plenipotentiary for knowledge economy.

"With the changing political landscape in Europe, including the accession of François Hollande to the position of French president, a new buzzword is entering the current 'Eurospeak': growth. To a certain extent, this is a welcome development after two years of austerity-dominated debates led by the protestant North. After all, you cannot save your way out of the recession, just as you cannot fast yourself to perfect health. Moderation may be helpful for a while, but at some point it will start to cause its own problems.

But is Europe, and particularly its most vulnerable countries, capable of achieving sustained economic growth? A new study by the World Economic Forum sheds light on this topic. It is encouraging and disconcerting at the same time. The study examines Europe’s economic competitiveness in the context of its flagship growth plan, the Europe 2020 strategy. The strategy focuses on creating preconditions for smart, innovation-based and hence sustainable growth while paying attention to the effects of growth on the environment and social inclusion (labour market and social cohesion).

Contrary to popular belief, economic competitiveness and social cohesion are not contradictory objectives. The countries are leaders in terms of smart growth conditions – the Nordics and Austria – are also the top performers in terms of social inclusion. This is important, as a lot of past efforts to advance competitiveness through structural reforms have been blocked by politicians on the grounds that they would harm social cohesion. Now it seems that the American competitiveness model, with its each-for-himself individualism, is not the only option available to Europeans.

But the report also confirms that the Southern countries, particularly Greece and Italy, but also Portugal and Spain, have a serious structural competitiveness problem. This is despite tens of billions of EU taxpayers’ money that these countries received as grants from EU development funds in the past decades. When it comes to their performance according to the Europe 2020 criteria, they all rank in the bottom half of the EU member states. Interestingly, no other 'old' member state is in this group of laggards.

This brings us to another, more sombre finding. A clear and major competitiveness divide remains in the EU not only along the North-South axis, but also along the old East-West fault line. This is worrisome because it means that, with time, Europe could face yet another round of economic problems, this time in the East.

Most of the Eastern European economies grew relatively fast for around a decade before the Great Recession started in 2009. Their growth was largely driven by an investment boom induced by their EU accession. Many of these investments were made by Western firms looking for cheaper manufacturing locations. Quite often, they were replacing factories that they had built in Southern Europe.

A similar relocation is starting to take place from some of the more advanced countries in Eastern Europe. Sound places for cheap manufacturing, with good infrastructure, a skilled labour force and secured property rights are becoming increasingly abundant in the world. Moreover, emerging market countries, such as China, India, Brazil and the United Arab Emirates are massively investing in knowledge infrastructure, including education and research. Without a much more focused effort, Eastern Europe will not be able to keep up with them, let alone with the more advanced parts of the EU.

A key problem in the EU’s East is a lack of high-quality public administration and strong political vision. Reforms targeting smart growth, such as effective public support of R&D or an efficient legal environment in the area of intellectual property rights may not be as politically difficult to adopt as increasing the pension age or cutting social benefits, but neither are they easy to achieve. These are sophisticated measures requiring highly capable government officials to design and implement them. Such officials are not abundant in Eastern Europe; yet dedicated and visionary political leaders who can force such solutions through are needed.

Unfortunately, truly visionary leadership seems to be in short demand across the entire EU. Yet major economic transformations require leaders who sell a dream. You cannot gain strong public support for reforms by arguing that your citizens have to accept a worse lifestyle compared to yesterday in order to avoid an even bigger decline tomorrow. That is why the stern austerity discourse pushed by Germany is starting to lead to a dead end in Europe’s South. The economic challenges that lay ahead for Europe go significantly beyond the currently empty state coffers."